General Motors Bankruptcy and Nationalization: Exit Strategy Needed

Congratulations: If you are a U.S. taxpayer, you will soon be a
part owner of a car company.

Under the latest reorganization plan for General Motors, Uncle
Sam would take ownership of 72.5 percent of the troubled automaker
while providing an additional $30 billion in funds to the
company.

The proposed deal would give Washington controlling ownership of
a major industrial corporation for the first time since Conrail
railroad was sold in 1986. And, along with the pending acquisition
of a minority stake in Chrysler, it would represent the first time
the U.S. has ever owned an automaker--joining China and several
European governments in that club. It is a road less traveled, for
good reason, and one America needs to exit.

Government-Directed Bankruptcy

The reorganization plan was filed by the government with the
Securities and Exchange Commission on Thursday.[1] At the same time,
bankruptcy proceedings for the much smaller Chrysler Corporation
are being wound up.

Of course, bankruptcy itself is not necessarily bad news; the
process is often the only way for troubled firms to reorganize
themselves. The process for General Motors, however--as has that of
Chrysler--is to be a government-directed and politically dominated
affair, funded largely by tax dollars and creating firms controlled
by Washington.

The short drive to bankruptcy and nationalization for Detroit
began last December, when GM and Chrysler first accepted bailout
money from the government. Both firms were required, as a condition
of aid, to prepare detailed plans to return to viability. In March,
those plans were flatly rejected by the White House, which
(correctly) found the changes being proposed far from sufficient to
resolve the problems of the firms.

From that moment on, Washington took over the driver's seat for
both firms. To emphasize the point, President Obama took the
unusual step of effectively, and unceremoniously, firing GM's chief
executive officer Rick Wagoner and half the GM board.

Washington Calling the Shots

Since that time, the federal government has been calling the
shots for both automakers. Tellingly, the reorganization plan
Chrysler took into bankruptcy was announced not from the firm's
Detroit HQ or a courthouse, but from the White House. And creditors
who opposed that deal, pointing out that they would get a mere
fraction of what the United Autoworkers Union (UAW) would get for
its claims, were personally lambasted by the President for their
failure to pursue what White House spokesman Robert Gibbs called
the "common good."[2] Thanks to government pressure--and billions
in additional taxpayer funds--Chrysler is soon expected to emerge
from bankruptcy with ownership shared among Italian carmaker Fiat,
the UAW, and the federal government.[3]

Now it is GM's turn in court, with a filing expected by June 1.
As outlined in the government's SEC filing, current GM bondholders
will be offered 10 percent of the firm's stock plus warrants for an
additional 15 percent, in return for their $27 billion in claims.
The UAW, by contrast--which is owed some $10 billion by GM for
health coverage claims--will receive 17.5 percent of the stock,
plus another 2.5 percent in warrants and $6.5 billion in preferred
shares.

This favoring of the politically influential UAW has led many
creditors to oppose the deal. If creditors are not pressured (as
were Chrysler creditors) to accept the offer, the issue goes to
court, to be decided by a bankruptcy judge.

These relatively small ownership shares, however, will be
dwarfed by the 72.5 percent stake to be grabbed by Washington. This
stake will come at a cost to the taxpayer: at least $30 billion in
additional loans to be provided to GM, on top of nearly $20 billion
already lent. (Of this, $8 billion will remain as loans to be
repaid.)

This is a staggering amount of money for the bailout of any
single firm. More harmful than the direct cost, however, may be the
cost of government management of this firm. History provides no
reason to think anyone in D.C. knows how to run a car company. A
look at the enterprises that Washington already runs--including the
Postal Service and Amtrak--does not reassure.

Dangers of Political Management

But the danger is not just that politicians do not know how to
run auto companies. It is that they know what they want to use them
for. As Robert Reich, President Clinton's labor secretary, said of
bailing out banks, "Is our main objective to make sure [banks]
become profitable and we get repaid? Or should we push management
to take actions that are in the public interest but not necessarily
geared toward higher shareholder returns? ... I'd say we should do
the latter. Otherwise, why bother bailing out [the companies] to
begin with?"[4]

Politicians will use enterprises they control to advance their
own agendas--even if those agendas conflict with the goal of making
products consumers want to buy. Case in point: EPA Administrator
Lisa Jackson has said, "What this country needs is one single
national road map that tells automakers ... what kind of car it is
they need to be designing and building."[5] She was referring to
fuel-efficient cars, which the President himself has dubbed the
"cars of the future." Consumers, of course, may not agree, perhaps
preferring the safety of larger vehicles. But with Washington in
charge, it may not matter.

Exit Strategy Needed

Ownership, acquired through a government-dominated bankruptcy
process, is the wrong approach. GM and Chrysler should be
restructured under established bankruptcy rules--without taxpayer
money or the federal control that comes with it. But if government
ownership does take effect, President Obama and Congress should
outline a clear exit strategy for taxpayers, as well as clear
guidelines on how the firm is to be run in the interim. Among the
necessary steps:

Establishing a firm, legally binding deadline--perhaps one
year--for the sale of the firm back to the private sector.

Establishing an expedited schedule for repayment of outstanding
federal loans. The repayment should extend no more than 36
months.

Prohibiting any further taxpayers loans or grants to GM.

Adopting clear guidance for GM's management and for federal
officials overseeing the corporation, making clear that during the
period of government ownership, establishing market value and
viability, rather than social or political goals, are to be the
primary objective.

Strictly barring GM during the period of government ownership
from making any campaign contributions or engaging in policy
advocacy of any kind. Due to its ties to government, GM's role in
the political arena while nationalized should be strictly
circumscribed.

Need to U-Turn

Last month, President Obama declared "I don't want to run auto
companies. ... I've got more than enough to do." But like it or
not, running auto companies is exactly what the federal government
is doing. That is the wrong road for Detroit, for consumers, and
for U.S. taxpayers. America needs to take the nearest exit.

James L.
Gattuso is Senior Research Fellow in Regulatory Policy in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Foundation.

[3]The
bankruptcy plan developed by the government employed novel
techniques for avoiding claims by upset creditors, by which
Chrysler's assets were sold to a newly created entity, leaving a
rump, debt-ridden firm. For more detail regarding this approach,
see Andrew Grossman, "Bailouts, Abusive Bankruptcies and the Rule
of Law," testimony before the Judiciary Committee, U.S. House of
Representatives, May 21, 2009, at http://www.heritage.org/research/economy/tst052209a.cfm
(May 29, 2009).

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

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